Advice for VCs from a serial founder
I recently raised a seed round and was in the process of working on a Series A before my company was acquired. Through that process I spoke with or met in person hundreds of investors. As Bryan stated below, there are no shortage of “How to pitch” or “How to behave” articles by VCs but really very little advice for VCs by founders.
So without further ado, here are my thoughts on some dos and don’ts for early stage investors.
Pay Attention
There were a number of times that I would be in meetings, mid-pitch, and one of the VCs would suddenly stop listening and do something on their phone. It seems like this would go without saying, but you have been fortunate enough that a committed, hard working founder is giving you their time and even considering taking money from you, so put away your phone. Don’t put it upside down on the table on vibrate, don’t leave it right side up on the table so you can see messages come through. Just leave it in your office or leave it in your bag. If you need to know what time it is, set an alarm to go off a few minutes before the meeting has a hard stop. Pay attention, take notes, ask questions, but your phone really has no place in the meeting. Taking notes makes the founder feel like you are paying attention and gives them clues about which parts of the pitch resonate.
Lines Not Dots
Raising money from a fund is a process, most founders get that. We’re going to tell you about our plans, execute on them, tell you about our challenges, and work on them. On each of those occasions you have an opportunity to say “this founder did what they said they were going to do.”
The relationship works in reverse however. As you are evaluating us for the ability to execute and present, we are evaluating you for your insights, courtesy, ability to show up on time, and more. If we think you may be cutting a sizable check and joining the board, we are evaluating you as a potential employee of our company. Do you show up on time for your meeting or do you make us wait in the lobby for 15 minutes? Do you give us your undivided attention? Have you been doing research outside of the meeting to show that you’re really interested in the space? What will it be like for me as a CEO to work with you? Can I count on you to do what you’ll say? Can I count on you to provide advice in a candid and thoughtful way? Do you respect my very limited time or do you believe this meeting is just about you and for you?
Rescheduling meetings with short notice is a bad signal. If it happens frequently we assume you will act that way as a board member as well, or worse we’ll just take it as a signal that you aren’t actually interested.
If you make any commitments for intros or feedback, do it and do it quickly. Founders can’t afford dead weight and we need people who are reliable like an atomic clock. Wow us with your consistency and follow through and you’ll win our hearts.
Don’t do reference checks
… until you are actually ready to write a check. Go forward with the assumption that the founder is a good person. If you have some common friends, feel free to ask around about them, but if you want to talk to former employees, colleagues or other investors, don’t until you are fully committed.
This one comes from personal experience, months into conversations and after reference checks (which went well) one particular VC decided he didn’t have commitment to the space. Being told “no” was fine, but hearing that “no” after I had burned political capital teeing up references was humiliating.
Arguably reference checks are pointless anyways because people always select those who will serve as a good reference.
Just don’t do reference checks ever until the term sheet has been issued and you’re almost ready to fund.
Do your research & apply your thesis early
The number of emails I got from eager VCs who want to chat and hear about our company was staggering. The number of those VCs who didn’t know our stage or who had some other part of their thesis that we didn’t match was also staggering.
If you are emailing founders, referencing our competitors, referencing somebody we may know in common, and generally showing that you have spent some time on our company before meeting, goes a long way. It’s frustrating to block 30 minutes for a phone call and discover 15 minutes in that you only do Series B and later but we haven’t even raised our Series A yet. This is public info.
Calls with VCs who reached out to me but didn’t do any research usually felt like I was giving a 101 crash course for them on our space and didn’t leave me with the impression that they would be a valuable investor.
Disclose intentions early
It’s not a big deal if you’re doing diligence on a competitor. In young categories, a smart founder recognizes that investment in a competitor is usually a good thing for them. It drives up valuations, creates interest in the category among other investors, and in a new space a well funded competitor is usually out there educating audiences about the very problem the startup solves.
If you are doing diligence on a competitor, or even if you’re just talking to a competitor, disclose it early in the conversation so that the founder understands the reason for your interest.
Explain conflict rationale
A handful of really great VCs declined to invest in my company and they had the courtesy of telling me that they felt like Company X in their portfolio would be a conflict. It’s awesome that you said no and said no early on, but explain the conflict. The founder is deeply immersed in the space and may be able to explain that the conflict actually doesn’t exist for some reason. That imagined conflict may actually be a great partnership opportunity for two portfolio companies to collaborate.
Get excited (and show it!)
Founders are duking it out day in and day out. Most of the time we are being told no by somebody whether it’s prospects, investors, or hires who aren’t willing to take the risk at a startup. The bottom line is that being a seed stage founder is mostly a very thankless job. Even at Meta SaaS which we sold in a ridiculously fast 16 months (from incorporation, 12 months from seed funding) we had so many people tell us that we were nuts, that we would be crushed, that we didn’t “get” the enterprise, that selling savings was too hard, that we didn’t have the right backgrounds, that we weren’t in the right geo, that we had our assumption numbers wrong, that nobody would pay what we were planning to charge. At some point every single assumption, decision, or plan we had was criticized and dissected by somebody.
Needless to say if you are listening to a founder and you think “this is pretty cool” then say that out loud. If the presentation was impressive, say it out loud. Smile. Get excited! It’s music to a founder’s ear that they may have stumbled across somebody else who thinks their vision isn’t completely foolish. You’ll build camaraderie even if you don’t invest.
If you’ve been through many VC meetings then you know that a good energy between a founder and investor is a bit like falling in love. You start riffing off of each other about “what if we also did this” and “we could expand into that”. It’s electric, it creates a bond. If you feel any interest in the business, don’t play it cool. All things equal, investors who play it cool lose out to those who get really excited. I would be inclined to accept slightly worse terms from an investor who made me feel good and spoke using the phrases “we” and “us”.
Don’t boomerang founders
If you have specific metrics you look for in early stage companies. Lay those cards out on the table at the very beginning of the conversation when you are explaining your thesis. When founders get told to “come back when you have X customer or N revenue”, sure some of them will, but probably not the ones you’d really want to invest in. When I was fundraising if I heard “I’d like to invest when you get to $X in revenue” and their metrics weren’t disclosed up front, I often thought of the investors as chickens and I always heard it as a “no”. There is no such thing as “not right now” there is just “yes” and “no”.
A good CEO is likely a sales person by nature. Just as you look at deal flow as a funnel, a good CEO disqualifies and moves on. We may say “sure I’ll keep you in the loop” or “sure I’ll add you to the quarterly update” but most of the time we won’t. Give a swift no, explain the rationale behind your no (if you understand it), and then I assure you the founder will be back on their next venture or they will at the very least remember your candor and recommend you to other founders they know…. Founders talk to each other.
Honor your commitments
You got in to the round at terms that seem fair and you’re excited about the venture. Congratulations! If you are a passive investor then your job is mostly over. Reflect back however, did you at any point say “I can introduce you to so and so at X Corp?” did you tell the founder you were friends with somebody they respect and would be happy to connect them? If you made even a single promise (hopefully you wrote it down because the founder definitely remembers it) execute on it FAST and keep the founder in the loop. Getting into the round is just the first part, I assume you’d like intros to other deals and if the venture succeeds through exit you’d like be invited to invest in their next venture.
Good founders take a “lead follow or get out of the way” approach. We’re on a mission to conquer the world and you’re either helping us, getting out of the way to let us do our jobs, or you’re a problem investor. If you made any promise of any kind to that founder to get into the round and you don’t come through, you just cheated your way into the deal and the founder knows it. Don’t make burning a bridge the first thing you do.
On the commitment front, speed matters as well. Founders are operating at hyper speed. We work 7 days a week. We work in our dreams. We drink coffee to get through late nights of presentations, product, and code. To you, following up a few months after your commitment might seem reasonable (and in most businesses that would be) but when you can see the end of the runway as a CEO, getting that intro today versus next month can have a big impact on our ability to move quickly and execute on what we promised. So don’t just honor your commitment, honor it FAST. Blow the founder away with how fast you moved. We remember the people who stuck their neck out and burned some political capital and did it fast. We call those people first for our next deal because we know they are fast movers. We recommend those people to other founders.
Don’t bullshit a bullshitter
CEOs are sales people. 90% of what we sell is a vision. Being a good CEO means getting over the feeling of being a fraud and becoming convinced that your vision of the future is the right one. Consequently good CEOs have laser sharp B.S. detectors. This is a great quality, it helps with hiring, strategy, sales, marketing, and keeping track of what competitors are really doing versus what they say they are doing.
That said, there is one common refrain that a LOT of founders laugh about behind closed doors, it’s when a VC says they are “value add VCs”. Value add carries with it a suggestion that you have something special you’re going to do. Perhaps it means you have an advisory board with deep connections to potential customers, perhaps it means you have an in house marketing group that will help the founders with a lot of heavy lifting and avoid burning cash on a hire, perhaps it means that you have a group of consultants who help with pricing.
If you can’t point to exactly what the value add is, then you’re not a value add investor… and that’s OK. We like investors who are honest. Tell us that you’re interested in the round, that you will help with intros if you can, but that you’re going to mainly be along for the ride and appreciate the opportunity. It is awesome when investors are honest like that. Some of my very favorite investors didn’t help me much, but it was clear up front that this was expected.
If you say you’re a value add and you can’t point to some specific feature then you aren’t being honest with the founder or yourself. Most founders understand the economics of a 2/20 fund. If you have a $50M fund you have $1M per year for all of your staff, travels, marketing, conventions, and your own salaries. I never really buy the value add claim from smaller funds. It just isn’t realistic.
Don’t one-up founders on work effort
You are a VC. If you’re a senior VC then most of your work happens around raising the fund. If you’re an associate then most of your work is on deal flow and analysis. Those are both awesome and respectable roles, but odds are good that on a Saturday at 8pm you aren’t skipping date night to fix some urgent bugs and it’s not likely that you’re cancelling your vacation (or just not scheduling them at all) because you know you can’t afford to ever be away from the office. That is a founder’s life story.
Your war stories about getting a deal done, flying to conventions, or boring board meetings are great, but they aren’t of the same time and intensity level that founders deal with. Just let the founder carry the cross of “hardest working guy in the room”. There is a theme here, candor and honesty among smart people goes a long way. It’s ok if you don’t work as hard as a founder, almost nobody does, but let’s not pretend. Let the founder’s ego be the bigger one because it’s probably pretty fragile at this point. Your fund isn’t likely to collapse next year, his or her startup probably feels like it might.
Blog but be careful what and how frequently
There are plenty of VCs whose blogs and social media posts I enjoy. Tom Tunguz , Mark Suster, the Open View blog, and many others are fantastic. I’d enjoy reading yours as well but remember that everything you write cements your brand.
If you say “I only fund entrepreneurs with these qualities” there is a good chance you just lost a future deal by a founder who found your list arbitrary or self serving. As an example, although I find him entertaining you couldn’t pay me to take money from Khosla. Sure they are great investors but some of Keith Rabois’ stances about not funding founders who use PCs were completely self defeating.
Maybe that’s a general rule he has, but putting it out in public runs the risk that PC using founders won’t bother to reach out. He also runs the risk that founders who use Macs and otherwise meet his criteria feel that his was a thoughtless statement and decide not to approach him. I fall into the latter category.
Conversely, if you do blog (or tweet, or post about vacations on Facebook) make sure that you don’t have any outstanding emails that you owe a response for. One VC I got to know was super slow to reply on a few things we were discussing but had plenty of time to blog, tweet, and simultaneously post vacation photos. When my email got a response a few days later it came along with “sorry for the delayed reply, I’ve been really busy”…. Really?
Treat founder intros with care
Many of my investors in Meta SaaS came through introductions from other founders. I’ve made countless intros to my investors on behalf of funds and startups. If an introduction was properly curated (meaning double opt in) then you need to treat it with great care. When we speak highly of you to somebody but 2 weeks later they can’t get a reply, it makes me look bad and I’m much less likely to ever make another intro. If I do make another intro I probably told the founder “hey, keep your expectations low, he doesn’t really reply half the time”… Enough dropped intros and I’ll just stop making them entirely.
As a founder it thrills me to help another founder get connected with a great investor. It gives me a little ego boost that I could help, it does some good by connecting two awesome people, and who knows, maybe it even helps with the favor bank in both directions.
Some intros I’ve made have been handled so well that I’ve been amazed. Billionaires who I have introduced other founders to are quick to respond and dive in, surely you can be as well…. And if for some reason you can’t be responsive, don’t take the double-opt intro in the first place. “Arlo I appreciate the intro but I’ve got a lot on my plate this month so I probably can’t give them the attention they deserve” goes a long way as does “Arlo, not a fit for me but thanks and keep me in the loop on future deals”.
Give advice from the trenches
Founders want advice. We are capable of filtering good from bad advice, but we only want and value advice from the trenches.
Many VCs have backgrounds in finance. That’s awesome. The world needs you…. but founders want advice from operators who have been in their shoes.
If your dad funded your first company, if you joined Facebook pre-IPO, if you were a VP at a company for 10 years, if you were the 10th hire, none of that counts and your advice will be discounted. Worse your advice may come off as looking like you’re trying to be self important.
This isn’t to say that there aren’t places where specific advice about specific situations may be useful, but the bulk of advice in early stage VC tends to be around GTM strategy and team management. Running an early stage team of 10 people is nothing like running a team of 100 at a company. Going to market in a brand new category with a half baked product is not the same as going to market with an established well funded company.
Assume the founder is knowledgable. Yes we know about the competitors. Yes we know about the challenges. Yes we know about the capital markets. We’re also talking to a lot of other investors so there is a good chance that you’ve just said the same thing somebody else said.
As a side note, if you’re a 27 year old associate and the founder is a 40 year old serial entrepreneur, tread carefully. We’ll smile and thank you for the “great idea” but you may find that for some odd reason we didn’t follow up with the financial projections you wanted…. Deal opportunity lost.
One tip I’ve learned while mentoring startups and investing is to pose your advice as a question. Rather than saying “You should run ads on Facebook targeted at XYZ demographic” ask “Have you considered running ads on Facebook targeting XYZ demographic?”… Same concept but the latter will be received and considered.
So give respectful advice if you are 100% sure it’s either from the trenches of experience or that it’s relevant. Otherwise you run the risk of looking bad, steering a young founder in the wrong direction, or worse…. you’ll miss out.
In Conclusion
If you only take away one thing from this article, let it be this: Founders talk.
We get together. We text. We have coffee. We help each other with intros and advice. We also warn each other about bad actors and share who the great investors are that have been honest and helpful. If you ask yourself “What if every founder in the world knew about what I said?” and feel good about it, then you’re probably making the right call.
Hopefully some of these tips were helpful to you as an investor. Happy hunting!
